It refers to “free-riders,” who do not pay for the cost of a product but who receive the benefit from it. It means that economic freedom is limited by the amount of income available to the consumer. It means that there is an opportunity cost when resources are used to provide “free” products. It indicates that products only have value because people are willing to pay for them. Question 2.2. (TCO 1) Henry wants to buy a book. The economic perspective suggests that Henry will buy the book if (Points : 3) the book will give him utility. his income is high. the marginal cost of the book is greater than its marginal benefit. the marginal benefit of the book is greater than its marginal cost. Question 3.3. (TCO 1) Which situation would most likely cause a nation's production possibilities curve to shift inward? (Points : 3) The construction of more capital goods An increase in discrimination based on race An increase in the number of skilled immigrant workers The destruction from bombing and warfare in a losing military conflict Question 4.4. (TCO 1) Which expression is another way of saying “marginal benefit”? (Points : 3) Benefits given up Unintended gain Employment benefits Extra benefit Question 5.5. (TCO 1) Which would not be considered as a capital resource of a business by an economist? (Points : 3) A van used by a mother to transport the family around An office computer used by an accountant A crane used by a building contractor A razor used by a barber Question 6.6. (TCO 1) Another term for capitalism is (Points : 3) the command system. the socialist economy. the market system. the system of inputs and outputs. Question 7.7. (TCO 1) Markets in which firms sell their output of goods and services are called (Points : 3) resource markets. product markets. command markets. mixed markets. Question 8.8. (TCO 1) By free enterprise, we mean that (Points : 3) products are provided free to those who can't afford to buy them. individuals may obtain resources, organize production, and sell the resulting output in any legal way they choose. individual producers are free to produce whatever the government decides is needed by the society. individuals are free to buy whatever products will satisfy their needs the most. Question 9.9. (TCO 1) Which is not one of the five fundamental questions that an economy must deal with? (Points : 3) How will the goods and services be produced? Why should the goods and services be produced? Who is to receive the goods and services produced in the economy? In what ways will progress be promoted? Question 10.10. (TCO 1) A characteristic of centrally planned economies is that (Points : 3) the price is relatively unimportant in allocating resources. output reflects the pattern of consumer spending. income is fairly distributed among individuals. there are many incentives for innovation and hard work. Question 11.11. (TCO 2) An increase in demand means that (Points : 3) given supply, the price of the product will decline. the demand curve has shifted to the right. price has declined and consumers therefore want to purchase more of the product. the demand curve has shifted to the left. Question 12.12. (TCO 2) At the point where the demand and supply curves intersect (Points : 3) the buying and selling decisions of consumers and producers are inconsistent with one another. the market is in disequilibrium. there is neither a surplus nor a shortage of the product. quantity demanded exceeds quantity supplied. Question 13.13. (TCO 2) If an effective price ceiling is placed on hamburgers then (Points : 3) the quantity demanded will exceed the quantity supplied. a black market for hamburger may evolve. consumers may want government to ration hamburger. all of these are likely outcomes. Question 14.14. (TCO 2) An increase in demand for oil along with a simultaneous increase in supply of oil will (Points : 3) decrease price and increase quantity. increase price and decrease quantity. increase quantity, but whether it increases price depends on how much each curve shifts. increase price, but whether it increases quantity depends on how much each curve shifts. Question 15.15. (TCO 2) For most products, purchases tend to fall with decreases in buyers' incomes. Such products are known as (Points : 3) inferior goods. direct goods. average goods. normal goods. Question 16.16. (TCO 2) When the price of a product is increased 10 percent, the quantity demanded decreases 15 percent. In this range of prices, demand for this product is (Points : 3) elastic. inelastic. cross-elastic. unitary elastic. Question 17.17. (TCO 2) Total revenue falls as the price of a good is raised, if the demand for the good is (Points : 3) elastic. inelastic. unitary elastic. perfectly elastic. Question 18.18. (TCO 2) You are the sales manager for a software company and have been informed that the price elasticity of demand for your most popular software is less than 1. To increase total revenues, you should: (Points : 3) increase the price of the software. decrease the price of the software. hold the price of the software constant. increase the supply of the software. Question 19.19. (TCO 2) If the demand for a product is elastic, then (Points : 3) a higher tax on the product will generate more tax revenue. a higher tax on the product will generate less tax revenue. total revenue will decrease as price decreases. total revenue will remain constant as price increases. Question 20.20. (TCO 2) Airlines charge business travelers more than leisure travelers because there is a more (Points : 3) elastic supply of business travel. inelastic supply of business travel. elastic demand for business travel. inelastic demand for business travel. Question 21.21. (TCO 3) Suppose that you could prepare your own tax return in 15 hours, or you could hire a tax specialist to prepare it for you in two hours. You value your time at $11 an hour. The tax specialist will charge you $55 an hour. The opportunity cost of preparing your own tax return is (Points : 3) $40. $55. $110. $165. Question 22.22. (TCO 3) Economic profits are equal to (Points : 3) total revenues minus fixed costs. total revenues minus the costs of raw materials. total revenues minus the opportunity costs of all inputs. gross profit minus selling and operating expenses. Question 23.23. (TCO 3) In the short run (Points : 3) a firm cannot vary its output level. all factors of production can be varied. a firm can change its fixed inputs. output is raised or reduced by changing the levels of variable inputs. Question 24.24. (TCO 3) Variable costs are (Points : 3) sunk costs. costs that change every day. costs that change with the level of production. the change in total cost due to the production of an additional unit of output. Question 25.25. (TCO 3) At an output of 20,000 units per year, a firm's variable costs are $80,000 and its average fixed costs are $3. The total costs per year for the firm are: (Points : 3) $80,000. $100,000. $140,000. $240,000. Question 26.26. (TCO 3) If you know that total fixed cost is $200, total variable cost is $600, and total product is four units, then average total cost must be: (Points : 3) $200. $250. $800. $3200. Page 2 Question 1.1. (TCO 3) In which market model would there be a unique product for which there are no close substitutes? (Points : 3) Monopolistic competition Pure competition Pure monopoly Oligopoly Question 2.2. (TCO 3) Local electric or gas utility companies mostly operate in which market model? (Points : 3) Monopolistic competition Pure competition Pure monopoly Oligopoly Question 3.3. (TCO 3) The production of agricultural products such as wheat or corn would best be described by which market model? (Points : 3) Monopolistic competition Pure competition Pure monopoly Oligopoly Question 4.4. (TCO 3) The demand curve faced by a purely competitive firm (Points : 3) has unitary elasticity. yields constant total revenues even when price changes. is identical to the market demand curve. is the same as its marginal revenue curve. Question 5.5. (TCO 3) Let us suppose Harry's, a local supplier of chili and pizza, has the following revenue-and-cost structure: Total Revenue $3,000 Per Week Total Variable Cost $2,000 Per Week Total Fixed Costs $2,000 Per Week (Points : 3) Harry's should stay open in the long run. Harry's should shut down in the short run. Harry's should stay open in the short run. Harry's should shut down in the short run but reopen in the long run. Question 6.6. (TCO 3) A firm should always continue to operate at a loss in the short run if (Points : 3) the firm will show a profit. the owner enjoys helping her customers. it can cover its variable costs and some of its fixed costs. the firm cannot produce any other products more profitably. Question 7.7. (TCO 3) In pure competition, price is determined where the industry (Points : 3) demand and supply curves intersect. total cost is greater than total revenue. demand intersects the individual firm's marginal cost curve. average total cost equals total variable costs. Question 8.8. (TCO 3) The classic example of a private, unregulated monopoly is (Points : 3) Xerox. De Beers. General Motors. General Electric. Question 9.9. (TCO 3) Barriers to entry (Points : 3) usually result in pure competition. can result from government regulation. exist in economic theory but not in the real world. are typically the result of wrongdoing on the part of a firm. Question 10.10. (TCO 3) The demand curve confronting a nondiscriminating, pure monopolist is (Points : 3) horizontal. the same as the industry's demand curve. more elastic than the demand curve confronting a competitive firm. derived by vertically summing the individual demand curves for the buyers. Question 11.11. (TCO 3) Which is the best example of price discrimination? (Points : 3) An airline company charging lower fares per pound for air freight than for passengers. A telephone company charging lower rates to weekend users than weekday users. A supermarket charging lower prices in its inner city store than its out-of-town store. A private doctor charging higher fees to patients receiving special services than patients receiving regular services. Question 12.12. (TCO 3) Monopolistic competition is characterized by firms (Points : 3) producing differentiated products. making economic profits in the long run. producing at optimal productive efficiency. producing where price equals marginal cost. Question 13.13. (TCO 3) Assume that in a monopolistically competitive industry, firms are earning economic profit. This situation will (Points : 3) reduce the excess capacity in the industry as firms expand production. attract other firms to enter the industry, causing the firm's profits to shrink. cause firms to standardize their product to limit the degree of competition. make the industry allocatively efficient as each firm seeks to maintain its profits. Question 14.14. (TCO 3) A unique feature of an oligopolistic industry is (Points : 3) low barriers to entry. standardized products. diminishing marginal returns. mutual interdependence. Question 15.15. (TCO 3) A low concentration ratio means that (Points : 3) there is a low probability of entering the industry. there is a low probability of success in the industry. each firm accounts for a small market share of the industry. each firm accounts for a large market share of the industry. Question 16.16. (TCO 3) In which set of market models are there the most significant barriers to entry? (Points : 3) Monopolistic competition and pure competition Monopolistic competition and pure monopoly Oligopoly and monopolistic competition Oligopoly and pure monopoly Question 17.17. (TCO 1) Money is not an economic resource because (Points : 3) money, as such, does not produce anything. idle money balances do not earn interest income. it is not scarce. money is not a free gift of nature. Question 18.18. (TCO 1) Refer to the diagram below which is based on the Circular Flow Model in Chapter 2. Arrows (1) and (2) represent diagram1 Graph Description (Points : 3) goods and resources, respectively. money incomes and output, respectively. output and money incomes, respectively. resources and goods, respectively. Question 19.19. (TCO 2) Refer to the diagram. A decrease in demand is depicted by a diagram2 Graph Description (Points : 3) move from Point x to Point y. shift from D1 to D2. shift from D2 to D1. move from Point y to Point x. Question 20.20. (TCO 2) Refer to the information and assume the stadium capacity is 5,000. If the Mudhens' management wanted a full house for the game, it would Price per Ticket Quantity Demanded $13 1,000 11 2,000 9 3,000 7 4,000 5 5,000 3 6,000 (Points : 3) set price so as to maximize its total revenue. encourage scalpers to sell their tickets for more than $7. set ticket prices at $5. set ticket prices at $9. Question 21.21. (TCO 2) Which type of goods is most adversely affected by recessions? (Points : 3) Goods for which the income-elasticity coefficient is relatively low or negative. Goods for which the income-elasticity coefficient is relatively high and positive. Goods for which the cross-elasticity coefficient is positive. Goods for which the cross-elasticity coefficient is negative. Question 22.22. (TCO 3) In the figure, Curves 1, 2, 3, and 4 represent the curves figure 1 Graph Description (Points : 3) ATC, MC, AFC, and AVC curves, respectively. MC, AFC, AVC, and ATC curves, respectively. MC, ATC, AVC, and AFC curves, respectively. ATC, AVC, AFC, and MC curves, respectively. Question 23.23. (TCO 1) Refer to the diagram. If society is producing nine units of bicycles and four units of computers and it now decides to increase computer output to six, the cost points diagram1 Graph Description (Points : 3) will be four units of bicycles. will be two units of bicycles. will be zero because unemployed resources are available. of doing so cannot be determined from the information given. Question 24.24. (TCO 3) What type of barrier to entry was used by De Beers throughout much of its history to maintain its monopoly position? (Points : 3) Patent protection Government regulation Economies of scale Ownership of an essential resource Question 25. Question : (TCO 3) a.) A pure monopolist determines that at the current level of output the marginal cost of production is $2, average variable costs are $2.75, and average total costs are $2.95. The marginal revenue is $2.75. What would you recommend that the monopolist do to maximize profits? b.) Why might a business owner keep their business open but let it deteriorate, rather than shut it down? Will this profitability last? Question 26. Question : (TCO 2) Evaluate how the following situations will affect the demand curve for iPods. (a) Income statistics show that income of 18–25-year-olds have increased by 10 percent over the last year. (b) Efforts of music artists wanting greater protection of their music result in more stringent enforcement of copyrights and the shutdown of numerous illegal downloading sites. (c) Believing that it has significant control of the market for portable digital music players, Apple decides to raise the price of iPods with the goal of increasing profits. (d) The price of milk decreases.